National Schools v. City of Los Angeles

These actions for declaratory relief were tried together and involve the same legal problems, which are presented in a single set of briefs on appeal. Each plaintiff! conducts a correspondence trade school with headquarters in Los Angeles, and the greater portion of its business is interstate commerce. The respective complaints attack the application to plaintiff’s business of the Los Angeles License Ordinance No. 77000, especially section 21.149 thereof, which at the time of commencement of the action imposed a licensing fee upon trade schools of $4.50 per quarter

Payment of the tax is a condition precedent to the doing of business within the city. Section 21.10 says: “No person shall engage in any business, profession, trade or occupation, or perform any act, required to be licensed under the provisions of this Article until such license is first obtained. ...”

During the pendency of the actions and before trial, the section was amended, effective on January 1, 1952, to reduce the fee to $12 per year, or fraction thereof, for the first $12,000, or less, of gross receipts and in addition thereto, the sum of $1.00 per year for each additional $1,000 of gross receipts in excess of $12,000. Otherwise the text of the section was not changed. Primarily plaintiffs sought adjudication that the application of the ordinance to their businesses would constitute an unlawful burden upon interstate commerce,—this because of the peculiar nature of the business of each. The cause was submitted upon a written stipulation of facts, no oral evidence was taken, and no findings made. The trial judge ruled in favor of defendant city, and hence these appeals.

Each plaintiff is a California corporation, with its executive office and its place or places of business located within the city of Los Angeles; National Schools is hereinafter designated as National and Radio-Television Training School, Inc. is called Radio. Radio is engaged exclusively in the business of conducting a correspondence school, teaching by means of home study a course in radio, television and allied electronics. National’s operations are divided into three departments, a residence school, a home study division, and a students’ store. In its residence school National conducts within the city an ordinary technical and trade school. Its

Radio’s entire gross receipts consist of tuition payments. It has some 4,200 students, 82 per cent of whom reside outside of California. National has some 17,500 correspondence students, 90 per cent of whom reside outside the state. About 45 per cent of its gross receipts comes from tuition fees. It thus appears that each plaintiff conducts a correspondence school business within California—18 and 10 per cent of students, respectively—and an interstate school from which Radio gets 82 per cent of its business and National 90 per cent.

The business of each company is nationwide, supported and promoted by generous advertising through magazines or the mails or both. When a prospect becomes a student he signs a contract which is forwarded to the home office in Los Angeles and there accepted. Radio has 15 field representatives who promote and service the business for it. National has no field representatives. Neither company has any office or place of business outside Los Angeles. The general procedure of each is substantially as follows. At the Los Angeles headquarters are prepared written lessons and materials for conducting experiments or constructing things like radio and television sets; these lessons and equipment are mailed to the students in installments from time to time; the student at his home base studies the lessons and performs the experiments and other work; he must fill out and return an examination paper on each lesson; also a report on each experiment or other job done; he is graded at the home office on each and comments are forwarded to him; these things go on, through the mails, for a period of 18 months for completion of the course; 139 completed lessons and examinations occur during the National curriculum and 112 in Radio’s course of in

It is agreed by counsel that this is interstate commerce so far as it embraces nonresident students. And it was so ruled, upon substantially the same facts, in International Text-Book Co. v. Pigg, 217 U.S. 91 [ 30 S.Ct. 481 , 54 L.Ed. 678 , 27 L.R.A.N.S. 493 ]. The stipulation of facts shows in each instance that the city proposes and intends to assess the said license tax to each plaintiff and “to include in the measure of said tax the plaintiff’s gross receipts as herein-above alleged from its correspondence students both within and without the State of California” and at the appropriate rates before and after amendment of section 21.149. The trial court ruled that “Gross receipts attributable to fees collected from home study students, whether located within or beyond the limits of the State of California, are properly and validly included in the measure of the tax imposed by the said Section 21.149.”

We here enter upon the recurrent and delicate task of accommodating the ever-increasing demands for more taxes on the part of the federal and state governments and their subordinate taxing agencies, one whose history “is spread over hundreds of volumes of our Reports” (Freeman v. Hewit, 329 U.S. 249 , 252 [ 67 S.Ct. 274 , 91 L.Ed. 265 ]). And the problem must be attacked with a realization of this truth: “To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future. Suffice it to say that especially in this field opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts.” (Freeman v. Hewit, supra, at p. 252 .)

It plainly appears here that the correspondence business of each plaintiff is readily severable into interstate and intrastate schools, 90 per cent and 82 per cent interstate, and balance intrastate. The word school has varying connotations. (78 C.J.S. p. 605, §1; Board of Supervisors v. Cothran, 84 Cal.App.2d 679 , 682 [ 191 P.2d 506 ] ; Weisse v. Board of Education, 178 Misc. 118 [ 32 N.Y.S.2d 258 , 261] ; Walkenhorst v. Kesler, 92 Utah 312 [ 67 P.2d 654 , 658] ; Bastendorf v. Arndt, 290 Mich. 423 [ 287 N.W. 579 , 580, 124 A.L.R. 445 ].) It may mean, among other things, the building in which instruction is given, or the assemblage within a building set aside for purpose of instruction, or the combination

Sprout v. South Bend, 277 U.S. 163 , 170-171 [ 48 S.Ct. 502 , 72 L.Ed. 833 , 837, 62 A.L.R. 45 ] : “A state may, by appropriate legislation, require payment of an occupation tax from one engaged in both intrastate and interstate commerce. . . . But in order that the fee or tax shall be valid, it must appear that it is imposed solely on account of the intrastate business; that the amount exacted is not increased because of the interstate business done; that one engaged exclusively in interstate commerce would not be subject to the imposition; and that the person taxed could discontinue the intrastate business without withdrawing also from the interstate business.”

The necessity of apportionment of the business for local taxing purposes, where it lends itself to that process, has been reiterated and made the basis of ruling by the United States Supreme Court many times. See Central Greyhound Lines v. Medley, 334 U.S. 653 , 663 [ 68 S.Ct. 1260 , 92 L.Ed. 1633 , 1641] ; J. D. Adams Mfg. Co. v. Storen, 304 U.S. 307 , 314 [ 58 S.Ct. 913 , 82 L.Ed. 1365 , 1371, 117 A.L.R. 429 ] ; Joseph v. Carter & Weekes S. Co., 330 U.S. 422 , 427 [ 67 S.Ct. 815 , 91 L.Ed. 993 , 1000] ; Norton Co. v. Department of Rev., 340 U.S. 534 , 539 [ 71 S.Ct. 377 , 95 L.Ed. 517 , 521] ; East Ohio Gas Co. v. Tax Com., 283 U.S. 465 , 470 [ 51 S.Ct. 499 , 75 L.Ed. 1171 , 1174] ; McGoldrick v. Berwind-White Coal Min. Co., 309 U.S. 33 , 46 [ 60 S.Ct. 388 , 84 L.Ed. 565 , 570, 128 A.L.R. 876 ], footnote 2; Cooney v. Mountain States Tel. & Tel. Co., 294 U.S. 384 , 393-394 [ 55 S.Ct. 477 , 79 L.Ed. 934 , 942] ; International Harvester Co. v. Evatt, 329 U.S. 416 , 422 [ 67 S.Ct. 444 , 91 L.Ed. 390 , 395] ; Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602 , 609-610 [ 71 S.Ct. 508 , 95 L.Ed. 573 , 579], “By its very nature an unapportioned gross receipts tax makes interstate transportation bear more than ‘a fair share of the cost of the local government whose protection it enjoys.’ ” (Central Greyhound Lines v. Mealey, supra, 334 U.S. 653 , 663 [ 68 S.Ct. 1260 , 92 L.Ed. 1633 , 1641].)

Although the opinion in City of Los Angeles v. Belridge Oil Co., 42 Cal.2d 823 [ 271 P.2d 5 ], does not discuss the im

Barker Bros., Inc. v. Los Angeles, 10 Cal.2d 603 , 609-610 [ 76 P.2d 97 ], is not opposed to the foregoing views. It says at page 609: “But in any computation of the amount of its gross sales the appellant may not make any deduction for goods shipped out of the state of California. The ordinance lays a tax upon the occupation or business, not upon particular sales. The volume of gross business fixes the amount of tax to be paid. Such a tax places no direct burden on commerce in the goods sold. All taxation has some incidental and indirect effect upon interstate commerce, but an excise tax which has only such remote effect is valid.” And the court explains the ruling by quoting Hump Hairpin Mfg. Co. v. Emmerson, 258 U.S. 290 , 295 [ 42 S.Ct. 305 , 66 L.Ed. 622 ], as follows: “ ‘The turning point of these decisions is, whether in its incidence the tax affects interstate commerce so directly and immediately as to amount to a genuine and substantial regulation of, or restraint upon it, or whether it affects it only incidentally or remotely so that the tax is not in reality a burden, although' in form it may touch and in fact distantly affect it.’ ”

In view of the clear line of demarcation prescribed by the foregoing authorities, it is unnecessary to undertake a review or reconcilement of the numerous cases dealing with the validity of a local tax assessed against some local incident of interstate commerce deemed to be severable and to have detached relevance for purposes of taxation. In this category fall the cited cases of Martin Ship Service Co. v. City of Los Angeles, 34 Cal.2d 793 [ 215 P.2d 24 ]; Michigan-

Throughout the eases dealing with local taxation of a sever-able incident of interstate commerce runs a discussion of whether the tax is of such a nature that it may be repeated in other jurisdictions, thus threatening multiple burdens upon that commerce and its complete extinction if carried to the theoretical extreme. The effect of those cases is thus summarized by Mr. Justice Traynor, “When there is no danger that several states will impose cumulative tax burdens on the same subject, a tax upon an activity that is a local incident of interstate commerce may be measured by gross receipts from that activity.” (Emphasis added; Martin Ship Service Co. v. City of Los Angeles, 34 Cal.2d 793 at 800 [ 215 P.2d 24 ].) And we apprehend that the multiple burden problem is confined to the “local incidents” cases. This appears from the above quotation from Gwin, White & Prince v. Henneford, supra, 305 U.S. 434 , 439 [ 59 S.Ct. 325 , 83 L.Ed. 272 , 276]. Immediately following that language is this: “Here the tax, measured by the entire volume of the interstate commerce in which appellant participates, is not apportioned to its activities within the state. If Washington is free to exact such a tax, other states to which the commerce extends may, with equal right, lay a tax similarly measured for the privilege of conducting within their respective territorial limits the activities there which contribute to the service. The present tax, though nominally local, thus in its practical operation discriminates against interstate commerce, since it imposes upon it, merely because interstate commerce is being done, the risk of a multiple burden to

The description of the taxpayer in the ordinance is ‘‘every person conducting a trade school . . . where instruction is given in any trade or occupation.” It must be construed to square with the commerce clause of the Federal Constitution (art. I, § 8) if that can be done reasonably. ‘‘As stated in Franklin v. Peterson, 87 Cal.App.2d 727 , 730 [ 197 P.2d 788 ], ‘It is the rule that where a statute or ordinance is susceptible of two constructions, one of which will render it constitutional and the other unconstitutional, in whole or in part, the court will adopt the construction which, without doing violence to the reasonable meaning of the language used, will render it valid in its entirety, or free from doubt as to its constitutionality, even though the other construction is equally reasonable. The rule is based on the presumption that the legislative body intended not to violate the Constitution, but to make a valid statute or ordinance within the scope of its constitutional powers.’ ” (City of Los Angeles v. Belridge Oil Co., supra, 42 Cal.2d 823 at 832.)

Volume 33, American Jurisprudence, page 351, section 29: “. . . a state statute imposing a general tax on certain kinds of businesses or occupations, and requiring a license to be taken out before such business or occupation shall be engaged in, must be construed as not applying to such business as may constitute interstate or foreign commerce, but only to such business of the kinds specified as constitutes local or state commerce, and to persons engaged or intending to engage therein. ” The proper construction of section 21.149 is that it applies to appellants’ intrastate

“ It is well settled that occupations and businesses may be classified and subdivided for purposes of taxation, and it is within the discretion of the Legislature to exact different license taxes from different classes or subclasses of businesses, subject only to the limitations of the state and federal Constitutions in regard to equal protection of the laws. No constitutional rights are violated if the burden of the license tax falls equally upon all members of a class, though other classes have lighter burdens or are wholly exempt, provided that the classification is reasonable, based on substantial differences between the pursuits separately grouped, and is not arbitrary.” It is said in City of San Mateo v. Mullin, 59 Cal.App.2d 652 , 655 [ 139 P.2d 351 ] : “A difference in the method of conducting a business is generally a sound basis for classification, particularly if it appears that the tax was fixed in proportion to the amount of business, which may be determined by different but reasonable methods.” Moreover, “When a legislative classification is questioned, if any state of facts reasonably can be conceived that would sustain it, there is a presumption of existence of that state of facts, and the burden of showing arbitrary action rests upon the one who assails the classification.” People v. Western Fruit Growers, 22 Cal.2d 494 , 507 [ 140 P.2d 13 ].) This the appellants have failed to do with respect to the classification under discussion. That the mere difference in rates charged different classes of schools does not constitute undue discrimination is conclusively settled by Fox etc. Gorp. v. City of Bakersfield, supra, 36 Cal.2d 136 .

Lastly it is argued on behalf of National that section 21.149 is not applicable to gross receipts from its students’ store. The argument is that other retail stores are charged less, under section 21.167; that prior to the 1952 amendment the tax on trade schools was eight times that exacted from retail stores, and since that amendment twice as much. It appears, however, that this students’ store is but a department of National’s correspondence school business. It is located on the second floor of plaintiff’s principal place of

The judgment in each case is reversed with instructions to make and enter judgment not inconsistent with the views hereinbefore expressed.

Wood (Parker), Acting P. J., and Vallée, J., concurred.

A petition for a rehearing was denied September 26, 1955, and the petition of respondent city of Los Angeles for a hearing by the Supreme Court was denied November 3, 1955.